Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 25, 1994 TAG: 9404260025
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: Mag Poff
DATELINE: LENGTH: Long
In late 1992, I began to hear that you have a problem if you mix untaxed dollars and taxed dollars in an IRA.
It dawned on me that the $40 a month that is withdrawn from my checking account and paid to Independent Life and Accident Co. is actually a contribution to IRA annuities. I woke up to the fact that I was doing a no-no. That $480 a year from 1987 through 1993 is mixed with 1984-1986 contributions.
I wrote to Independent Life in January 1993. The company replied that my accountant should be completing Form 8606 and attaching it to my tax return each year. The letter said any money withdrawn would be subject to taxes and penalties.
I obviously haven't done that. What can I do to remedy this situation with the IRS?
Also, what would you do with these annuities? In August, two IRA CDs came due and, with rates so low, I transferred the $6,000 to the AARP Capital Growth Fund. It gained 24 percent in 1993. Should I stop my bank drafts to Independent Life so I can perhaps transfer it to AARP mutual funds. What do you know, good or bad, about Independent Life and the AARP funds?
A: You should stop the bank drafts by Independent Life. Both IRAs and annuities are tax-deferred vehicles, so it is not a good idea to put one inside the other. You should use an IRA to shelter a bank certificate or a mutual fund. But you probably will have to leave your existing fund where it is because of heavy withdrawal penalties. Your letter from the insurance company mentions this surrender charge.
Independent Life and Accident is rated A-minus by A.M. Best, its fourth-highest rating. Weiss Research rates the company C+, its seventh-highest ranking. Neither rating is outstanding, but they are not especially dangerous.
Andrew M. Hudick of Fee-Only Financial Planning in Roanoke said you must comply with IRS rules and report your IRA contributions in a timely fashion on Form 8606. The IRS requires taxpayers to maintain the records of their nondeductible IRA contributions.
Hudick said there is no IRS rule prohibiting, nor is there a problem with, commingling IRA contributions. But without proof to the contrary, he said, the IRS will assume all distributions from an IRA or other retirement plan are fully taxable.
As a practical matter, he said, it would be impossible to separate the nondeductible (and therefore nontaxable) monies within an IRA from the taxable portion. Remember that the earnings building up within the IRA are taxable, since they are deferred.
Even if you were able to move the nondeductible portion to another investment, you still would have some taxable monies within the account from dividends and interest.
Under strict IRS rules, you should have notified the IRS annually. Hudick said you can file an amended Form 8606 for the tax years 1991 through 1993. You must do this no later than April 15, 1995. You will, of course, file the form next year for 1994. Your 1994 return would show this cumulative four-year, nondeductible contribution total. Had you followed your insurance company's advice a year ago, you could have amended 1989 as well.
For the earlier years, save your tax returns for those years forever. They should help you establish that you were in a tax bracket that barred deductions for IRA contributions.
If you chose to continue your IRA, you must report these contributions on Form 8606 each year. This will continue to establish your basis for future contributions and subsequently for any future distributions.
Biweekly payments
Q: We are using the new Crestar biweekly mortgage that provides for a payment every two weeks of half the monthly mortgage amount. Now we have discovered that the bank posts the payment monthly and makes the extra half-monthly payment only twice a year.
We are trying to determine whether to go monthly or whether we would be better off sticking to the biweekly.
A: The procedure you describe is set forth in the authorization contract that all new applicants for the biweekly plan are required to sign.
Your contract says the bank will collect the payments that you make every other week in a special holding account. When the bank has a monthly amount, it makes the mortgage payment.
Because you are paying for an extra month each year through 26 biweekly payments, the bank allocates an extra half-payment each half-year. All of this money is applied against the principal.
Crestar also pays interest on the money in the holding account at the statement savings rate. This interest is applied against the principal at the end of the year. You will pay off the mortgage faster, and thus somewhat reduce the total amount of interest, by using the biweekly plan. That's because an extra month's payment and the interest in the holding account are applied to the principal each year. But only you can tell how important this factor is to you.
The Crestar plan requires automatic deduction of the biweekly payments from a checking account at the bank.
by CNB